OPEC

OPEC Just Screwed You

According to one Organization of the Petroleum Exporting Countries (OPEC) exec, the recent summit that failed to either raise or lower output was "one of the worst meetings we've ever had." But it wasn't just bad for them; it was bad for you. As a result of the indecision to increase production before the summer driving season, oil prices rose 2%. Rest assured that money will eventually find its way out of your pocket. But then again, we shouldn't be surprised. It's rare to see OPEC working in our interest.

Formed in 1960, OPEC is a powerful and controversial international oil group composed of 12 nations: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Since its inception, the organization has been responsible for generating vast sums of wealth for its member nations. And as the organization turns 50, it aims to maintain current oil production levels — even as demand goes up.

By definition, OPEC is a cartel — a group of producers that tries to restrict output in an effort to keep prices higher than the competitive level. Vilified in the West as a staunch defender of its own interests, yet still not fully understood by most of the public, we think it’s time to introduce you to five things you didn’t know about OPEC, your friendly neighborhood oil cartel.

1- It no longer sets crude oil prices

OPEC admits to setting crude oil prices in the ‘70s and ’80s — they would look ridiculous to try and deny it. However, the oil market underwent a transformation in the 1990s and today, prices for crude oil are established according to three markets: 1) The New York Mercantile Exchange; 2) The International Petroleum Exchange in London; and 3) The Singapore International Monetary Exchange.

This isn’t to suggest that OPEC has no influence on prices; quite the contrary. Prices established by the exchanges are based on supply and demand. Therefore, any decision OPEC makes concerning restricting production, for example, will have some effect on prices. These decisions, however, can have a direct consequence on profit margin, so it isn’t always in their best interests.

2- Its practices are considered to be illegal

Simply put: Cartels are illegal in many countries. In the U.S., for example, OPEC is in direct violation of antitrust laws, such as the Sherman Antitrust Act of 1890 — the same act that broke up Standard Oil, American Tobacco and Ma Bell. Antitrust laws don’t criminalize monopolies per se, only if the monopoly is used to eliminate its competition through methods of production or price-fixing.

Ordinarily, U.S. antitrust laws explicitly prohibit dealing with cartels. What makes OPEC so special? Simple: Congress grants OPEC diplomatic immunity from prosecution and in essence treats it as though it were a sovereign nation, even though this is not remotely the case. This status was tested in 1978, when the International Association of Machinists and Aerospace Workers (IAMAW), a non-profit labor organization in the U.S., filed suit against OPEC under the Sherman Act. In 1981, the U.S. Ninth Circuit Court of Appeals rejected the case, claiming OPEC was protected by its sovereign immunity status.